China in transition: 6 key questions

You may have heard: The United States and China haven’t been getting along, particularly as it relates to trade. We all know a lot about the United States., but what about China? How did China get so big? How is China’s transition going? What are some challenges it is facing? And why, as investors, should we care?

1. You probably know that China is big, but just how big?

Really big. China’s economy is the second largest in the world (GDP: ~$13 trillion), second only to the United States (GDP: $20 trillion). Together, the United States and China make up 40% of global GDP. Moreover, China’s GDP is roughly equal to the GDP of the United Kingdom, India, France, Brazil, Italy and Canada combined.

In some ways (per capita GDP, military spending, number of billionaires, just to name a few), the United States is still much bigger than China. However, China dwarfs the United States in others (China consumes nine times the amount of copper as the United States, has three times the number of internet users, and double the CO2 emissions). China continues to grow, and from 2009–2017, China accounted for over 30% of global GDP growth. We told you. It’s really big.

Each country has a very different relationship between its economy, government and markets. The U.S. economy is driven by services, finance and consumption. And while China has similar aspirations for the future, it has historically relied on its low cost labor and manufacturing to generate growth. When it comes to policy, China’s economy is controlled by government mandate, while the United States relies upon democracy and capitalism to fuel innovation and growth.

2. What else drives the Chinese economy?

Humans: China has more than four times as many people as the United States. This has helped fuel growth as millions of subsistence farmers have moved to urban areas to find employment. It has also supported China’s low-cost labor structure, driving its speedy industrialization and preeminence as a manufacturing powerhouse. China’s entry into the World Trade Organization in 2001 likewise rapidly transformed it into an export-driven, manufacturing-focused economy providing global consumers access to more affordable goods (e.g., mobile phones, light bulbs, t-shirts, countertops).

The final step toward economic maturation is consumption-driven growth and market share in high-value-added manufacturing. Given the country’s growing middle class and ongoing household urbanization, Chinese policymakers are focused on managing the transition from a manufacturing-led to a consumer-based economy.

However, not even China is immune to economic slowdowns. When growth falters, the government works to stimulate growth. As China’s economic model continues to evolve, the government has also maintained its heavy involvement.

3. So what does “Made in China 2025” have to do with it?

China is an economy in massive transition, and “Made in China 2025” is the cornerstone of China’s plan. A comprehensive, 10-year plan to transform China into a technology manufacturing leader, its purpose is to boost China’s global competitiveness through technology and tech-driven industries. The plan targets 10 key sectors, aiming to achieve supremacy in certain industries, such as robotics, aerospace and aviation, advanced rail equipment, new energy vehicles and agriculture machinery. Basically, the future of everything.

4. How is China going to do it?

That part is complicated. In short, Chinese companies are seeking to significantly boost research and development spending in key areas. Companies in these industries would receive subsidies, preferential financing, protection from foreign competition and other government resources to support growth.

But it may not be all smooth sailing. Chinese growth has been catalyzed by debt-financed fixed investment, leading to debt-to-GDP levels (210% for China) that are more comparable to developed markets than emerging ones.

So, what is China doing about it? Policymakers have identified “financial stability” as crucial to economic success. The government has reinforced its ability to address leverage and future credit growth, in part by targeting speculative investments and more stringent People’s Bank of China (PBoC) regulations. Meanwhile, government supply-side reforms have worked to cut overcapacity in manufacturing and reduce debt levels in traditional sector companies.

5. What other tools can China use to influence its economy?

Policymakers have shifted from tightening conditions in 2017 to easing them in 2018. Further, compared to the past, China has a much broader toolkit at its disposal to enact reforms. This includes: 

  • Monetary support: The PBoC is working to cut reserve requirements for small and medium-sized banks through a number of programs.
  • Foreign exchange: China now allows for market-driven depreciation of the Yuan.
  • Fiscal policy: A large fiscal stimulus program was recently announced.
  • Financial regulatory policies: China announced a more balanced approach to cleaning up debt.
  • Housing: Property market data has been stable, though policy tightening around housing may continue.

6. Why should investors care?

China is big, and scale matters. With the country driving a significant portion of global economic growth, a speed-up or slowdown in China could have ripple effects for the rest of the world—not to mention what could happen if China suffered a real crisis. But China has many tools at its disposal and a political system that can work swiftly to address issues as they arise. But you can’t invest in GDP…

With respect to capital markets, Chinese assets are a large part of some indices (33% of MSCI EM) and may continue to grow over time. Some estimates suggest that Chinese stocks and bonds could comprise up to one-third of assets in balanced portfolios. Chinese onshore equities only have a .05% weight in the MSCI ACWI, but they comprise around 10% of world equity market cap. In short, China seems primed to be an even larger contributor to global economic growth and financial market performance in the near future.

For ideas on how to incorporate these views in a way that is suitable for you, we invite you to contact your J.P. Morgan representative.

Sources as of 2018 include:

  • World Bank, MSCI
  • China National Bureau of Statistics
  • U.S. Bureau of Economic Analysis
  • The State Council of the People’s Republic of China
  • Haver Analytics, Bloomberg
  • FactSet, J.P. Morgan Private Bank Economics


Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.

Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward looking views in order to meet the portfolio's investment objective.

As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to I00 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.

While our internally managed strategies generally align well with our forward looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios. 


Purpose of This Material This material is for information purposes only. The information provided may inform you of certain investment products and services offered by J.P. Morgan’s private banking business, part of JPMorgan Chase & Co. The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read this Important Information in its entirety.

Confidentiality This material is confidential and intended for your personal use. It should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission.

JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (JPMS), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.


Non-reliance We believe the sourced information contained on this site to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of material on this site. We do not make any representation or warranty with regard to any computations, graphs, tables, diagrams or commentary on this site which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed on this site constitute our judgment based on current market conditions and are subject to change without notice. We assume no duty to update any information on this site in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of J.P. Morgan, view expressed for other purposes or in other contexts, and the content created by J.P. Morgan Private Bank should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward looking statements should not be considered as guarantees or predictions of future events. Investors may get back less than they invested, and past performance is not a reliable indicator of future results.

Risks, Considerations and Additional information There may be different or additional factors which are not reflected on this site, but which may impact on a client’s portfolio or investment decision. The information contained on this site is intended to be general market commentary and should not be relied upon in isolation for the purpose of making an investment decision. Nothing on this site shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document is intended to constitute a representation that any investment strategy or product is suitable for you. You should consider carefully whether any products and strategies discussed are suitable for your needs, and to obtain additional information prior to making an investment decision. Nothing on this site shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such a communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions. Contact your J.P. Morgan representative for additional information concerning your personal investment goals. You should be aware of the general and specific risks relevant to the matters discussed on this site. You will independently, without any reliance on J.P. Morgan, make your own judgment and decision with respect to any investment or strategy referenced on this site.

J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document.

JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.

References in this report to “J.P. Morgan” are to JPMorgan Chase & Co., its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the marketing name for the private banking business conducted by J.P. Morgan.

If you have any questions or no longer wish to receive these communications, please contact your usual J.P. Morgan representative.


© 2017 JPMorgan Chase & Co. All rights reserved